401k Plan Benchmarking; how often should it be done?

You know that you need to Benchmark your 401k plan. But do you know how often the DOL expects you to do this? Do you know what the ramifications are if you do not?

What does it mean to Benchmark a 401K plan?

To Benchmark a 401k plan means that you compare the plan to other plans in similar size and in similar Industries. A good 401K advisor will automatically do this for their client on a regular basis. A benchmark report will compare the fees, investment options, investment performance, employee contributions, business contributions, plan design , and various other features. Your benchmark report should be the main metric that you use to judge the overall performance and benefit of your businesses 401K plan.

How often should a 401K plan have a benchmark report?

At minimum you should Benchmark your 401K plan once every three years per DOL regulations. This should be in a printed report and saved in your compliance file.

But 401K best practices suggest that a plan be benchmarked every 1 to 2 years. This is because of the rapidly changing Economic and Business environment in today’s world. If a business experiences significant changes it could cause the 401K plan to no longer compare well to others of similar size or industry.

Many advisors provide a benchmark report as part of their ongoing services. So ideally the business owner is proactively provided this report every one to two years by their advisor.

Why is a benchmark report important?

As a sponsor of a 401k plan, you are legally required to provide the best possible plan within reason for your employees. The DOL does not care if you are happy with your plan… they care if your plan has reasonable expenses and investment options compared to plans of similar size and in similar Industries. That is also what a court of law will care about if a lawsuit is ever brought against you for failing to fulfill your fiduciary requirements as a plan sponsor. And as I have written about before, one of the main requirements as a fiduciary is to ensure reasonable fees and competitive investment options. The only way to ensure that is to compare your plan to what else is out there. That is the legal expectation that has been established.

Are there different types of Benchmark reports?

There are a few different types of Benchmark reports available. The most common type found is a general comprehensive Benchmark report. This covers all areas of the plan and compare it to it’s suitable peer group. There are also Benchmark reports that cover only the expenses of the plan or only the investment options of the plan. However, the DOL expects a comprehensive Benchmark report a minimum of every three years.

Many service providers who provide 401K recordkeeping services will offer a benchmark report for the plan through the plans advisor. This report is generally considered more than enough to meet the Benchmark report requirements by the DOL.

However, there are some within the industry who feel that the best Benchmark report is created by an impartial third party. They take exception to a service provider offering a benchmark of their own services. Many in this Camp claim that it creates a conflict of interest when generating the report. But many service providers are starting to use third-party software to generate the reports. So this argument is becoming less and less relevant. However, it is something to be mindful of when reviewing a benchmark report.

How do I get my 401k plan benchmarked?

Ideally your current plan advisor should be providing this to you on a proactive basis at minimum every three years. If they are not you can always ask them to have the Record Keeper run one for the plan. But it might be worth your time to have a third party evaluate the plan and generate a benchmark report for you. Any advisor who specializes in retirement plans should have access to Benchmark report software. If you would like 2/2 strategy retirement run a benchmark report for your plan feel free to contact us here.

Thanks for taking the time to read my article today. If you enjoyed it, feel free to take a look at some other articles and case studies that I have written about.